Short term investment decisions affect the Day to Day working of business.
Short term investment decisions refer to the allocation of funds in assets or activities that have a relatively short maturity period, typically less than one year. These decisions have a direct impact on the day-to-day functioning of a business. Here's how:
1. Liquidity management: Short term investments help businesses manage their liquidity needs. By investing in liquid assets such as short-term bonds, money market instruments, or even cash reserves, businesses can ensure they have sufficient funds to meet their short-term obligations, such as paying salaries, purchasing inventory, or covering operating expenses.
2. Working capital management: Short term investments play a crucial role in managing working capital requirements. By investing excess cash in short-term instruments, businesses can earn a return on their idle funds while still having the flexibility to access the funds when needed for day-to-day operations.
3. Risk mitigation: Short term investments can help businesses mitigate financial risks. By diversifying their investment portfolio across different assets or sectors, businesses can reduce the impact of market volatility or unexpected events on their overall financial position.
4. Opportunity cost: The decision to invest in short-term assets also involves evaluating the opportunity cost of alternative uses of funds. By investing in short-term assets, businesses may forgo other opportunities such as long-term investments or expansion projects. Therefore, careful consideration is required to strike a balance between short-term liquidity needs and long-term growth prospects.
In conclusion, short term investment decisions have a direct impact on the day-to-day working of a business by managing liquidity, working capital, mitigating risks, and optimizing the use of funds. These decisions are vital for maintaining financial stability and ensuring the smooth functioning of the business in the short term.